India likely to grow by 7.1 pct in FY2016-17, says Fitch Ratings

India’s gross domestic product (GDP) is expected to grow by 7.1 percent in the fiscal year 2016-17, before picking up to 7.7 percent in both FY17-18 and FY18-19. Gradual implementation of the structural reform agenda is expected to contribute to higher growth, as will higher real disposable income, supported by an almost 24 percent hike in civil servants’ wages at the state level, Fitch Ratings reported.

According to official statistics, GDP was hardly hit in 4Q16 by the cash crunch, after the government’s move to pull 86 percent of currency in circulation out of the economy overnight. Year-on-year GDP growth slowed only marginally in 4Q16, to 7.0 percent from 7.4 percent in the previous quarter.

One reason for this discrepancy could be the inability of official data to capture the negative effects of the demonetization on the informal sector. However, the formal sector also remained surprisingly robust. This raises the possibility that these initial estimates of the growth impact of demonetization could well be underestimated, with the possibility of revisions to official GDP data later on.

Macroeconomic policy support to growth may gradually fade. There may still be some positive impact from the previous accommodative monetary policy stance, but the Reserve Bank of India signaled in its February meeting that its interest-rate easing cycle had come to end.

"We are now expecting the policy interest rate to stay at its current level of 6.25 percent. At the same time, the government announced in the last budget the raising of the deficit target for FY18 to 3.2 percent of GDP, from 3.0 percent, which would support growth," the report commented.